On May 8, 2003, United States magistrate Judge Roanne L. Mann issued a report and Recommendation (”R&R”), finding damages in favor of the plaintiffs in the amount of $ 2,272,647.80 On February 22, 2006, this Court adopted Judge Mann’s R&R in its entirety and entered judgment for the plaintiffs. However, by the time, both LMG and All Pro had declared bankruptcy. The judgment remains unsatisfied.

Calemine v. Gesell, 2008 U.S. Dist. LEXIS 78042, 1-17 (E.D.N.Y. Oct. 2, 2008)

In difficult economic times, a case like Calemine resonates more than it would otherwise.  Here, the plaintiffs obtained a judgment, but the defendant employers declared bankruptcy.  Unpaid plan contributions lay at the center of the dispute.  This recent opinion illustrates that judgments against the bankrupt employer may not be worthless after all.

Posture Of The Case

It is important to note that the facts were all assumed to be true and provable since the issues arose in the context of the defendants’ motions to dismiss.

Dismissal under Rule 12(b)(6) is appropriate if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80, (1957). Furthermore, when considering a motion to dismiss a complaint under Rule 12(b)(6), a court “must accept as true all of the factual allegations set out in plaintiff’s complaint, draw inferences from those allegations in the light most favorable to plaintiff, and construe the complaint liberally.” Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001).

With that caveat in mind, the legal arguments presented are recapped below.

Breach Of Fiduciary Duty Claims

The defendants, corporate officers of the defunct company, asserted that the plaintiff’s claims based upon alleged breaches of fiduciary duty were time-barred.  The Court agreed.

A couple of points are still worth noting here.

First, the court, for the purposes of this motion, assumed that the missing contributions were assets of the Fund’s plan.  The supporting authorities are noted in this excerpt:

Pension Benefit Guaranty Corp. v. Solmsen, 671 F. Supp. 938 (E.D.N.Y. 1987), is among the regularly-cited cases in which “courts have consistently held that employers who exercise discretionary control over funds that are designated for deposit into an ERISA fund qualify as fiduciaries, including individuals managing corporations obliged to mare fund contributions. NYSA-ILA Med. & Clinical Servs. Fund By & Through Capo v. Catucci, 60 F. Supp. 2d 194, 202 (S.D.N.Y. 1999). See also Connors v. Paybra Mining Co., 807 F. Supp 1242, 1246 (S.D.W.V. 1992) (individuals who, as officers, directors, and sole shareholders of corporations in debt to ERISA funds, “exercised broad personal discretion and control over the assets and spending practices of the corporat[ions], … [and] decisions on which bills to pay and … which of those bills were being delayed to pay…. Contributions due and owing the funds were withheld and directed elsewhere and such spending decisions were the personal, conscious choices of these Defendants.”)

Second, the court held that the plaintiffs made out a sufficient case that the individual defendants were fiduciaries:

Plaintiffs allege that Defendant  [*9] Robert Gesell was an LMG shareholder and President of LMG. Robert Gesell ran LMG Air Corporation, and he was the president and the officer in charge. Id. at 7. He also signed the collective bargaining agreements with Local Union 295. Id. Defendant Ronald Gesell was an LMG shareholder, the Secretary-Treasury of LMG and the general manger of All Pro. Id. At trial, Ronald Gesell verified that he was “primarily in charge of All Pro . . . .” Id. Defendant Eileen Gesell was an All Pro shareholder and held the office of President. At trial, Ronald Gesell confirmed that that Eileen Gesell supervised the bookkeeping and accounting for All Pro. Id. at 7. Under these circumstances, for the purposes of the Rule 12(b)(6) and 12(b)(1) motions, Defendants do qualify as fiduciaries.

Statute Of Limitations

The breach of fiduciary duty claims ran afoul of the statute of limitations, however, as the court rejected a “continuing violation” theory advanced by the plaintiffs:

I. . . as late as 1998, the Plaintiffs’ were aware that the corporations were operating illegally as “alter-ego” companies and that therefore the Defendants, as controlling corporate officials, were also responsible for delinquent contributions to their Fund. This claim is not “inherently susceptible to being broken down into a series of independent and distinct events or wrongs, each having its own associated damages.” . . . Indeed, the gravamen of the Plaintiffs’ complaint is grounded in facts known to them since the entry of the 1998 judgment. The instant action was filed August 29, 2006, and this date exceeds the six-year applicable statute of limitations. Therefore, the Court grants Defendants’ motion to dismiss Plaintiffs’ claim for breach of fiduciary duty.

Enforcement Of Judgment Against Plan Fiduciaries

The plaintiffs were not finished, however, as they had an argument based upon enforcement of the judgments against the bankrupt corporation.  The plaintiffs sought to hold the Defendants personally liable for the corporations’ judgment  of liability to the Fund “pursuant to ERISA and federal common law.”

The plaintiff’s theory gave them a important advantage in view of the limitations period issue.

Plaintiffs rely on the 20-year stature of limitations to enforce judgments, found in N.Y. C.P.L.R. § 211(b). For the purposes of deciding this motion, based on the allegations of the Amended Complaint, this Court accepts Plaintiffs’ allegations that Defendants (1) are controlling officers, and (2) defrauded and conspired to defraud the Fund’s plan of required contributions.

. . . .

The outstanding judgment for damages owed to the Fund’s plan by the corporation is dated February 17, 2006 in the amount of $ 2,272,647. Therefore, the Plaintiffs’ claims to hold the Defendants’ personally liable for the corporation’s judgment are well within the 20 year limitations window. Defendants’ motion to dismiss Plaintiffs’ second claim is denied.

Action For An Accounting

The plaintiffs’ fortunes improved as well on their claim for an accounting.

As corporate controlling officials of All Pro and LMG, the Defendants are required to provide a financial accounting based on the actions taken in their capacity as corporate officers.  Thus Defendant’s motion to dismiss the Plaintiffs’ third claim is denied.

Piercing the Corporate Veil

The plaintiff’s advanced yet another state law claim that found favor with the court in their bid to peirce the corporate veil”.  The defendants met this argument with jurisdictional defenses that were rebuffed by the court.

As noted supra, this Court found that the Plaintiffs have adequately demonstrated the possibility that Defendants’ may bear personal liability under ERISA for defrauding or conspiring to defraud a benefit fund of contributions, while acting in their role as corporate officers. Such fraud is explicitly recognized as the type that can expose corporate officers to personal liability under ERISA. Therefore, contrary to the Defendants’ argument, the Plaintiffs have established subject matter jurisdiction based upon an underlying violation of ERISA.

Note: It is important to note that the claim attempting to enforce the judgment was based upon ERISA and federal common law.  This theory has a lineage that must be carefully considered in evaluating the viability of the claim.  The Second Circuit caselaw begins with Leddy v. Standard Drywall, Inc., 875 F.2d 383, 388 (2d Cir. 1989).  The district court commented on that case as follows:

There [in Leddy], the Court relied on Fair Labor Standards Act precedents that imposed liability on “a corporate officer with operational control who [was] directly responsible for a failure to pay statutorily required wages.” Id. The court held that “at least to the extent that a controlling corporate official defrauds or conspires to defraud a benefit fund of required contributions, the official is individually liable under Section 502 of ERISA, 29 U.S.C. § 1132.” Id. at 388.

In this case, Defendants were corporate officials and exercised control & power over entities deemed to have been operated illegally as “alter-egos.” It is argued that the Defendants, in their capacity as corporate officers are exposed to liability for judgments entered against the corporation. These facts fit squarely within the exception to the rule wherein a corporate official defrauds or conspires to defraud a benefit fund of required official might be held personally liable under ERISA.

As noted at the outset, the alleged facts were assumed to be true for purposes of the motion.  As the case develops, the plaintiffs have a substantial proof burden to meet in order to impose liability on the theories alleged in their Amended Complaint.

The General Rule – As a general rule, individuals are not liable for corporate ERISA obligations solely by virtue of his and her role as officer, shareholder or manager. Cement & Concrete Workers Dist. Counsil Welfare Fund, Pension Fund, Legal Servs Fund & Annuity Fund v. Lollo, 148 F.3d 194, 195 (2d Cir. N.Y.1998) laid the groundwork for the exception invoked above, stating:

“one circumstance pertinent to this matter in which a corporate official might be personally liable under ERISA — namely where a controlling corporate official defrauds or conspires to defraud a benefit fund of required contributions.”

The Second Circuit appears to be a trailblazer on this issue, incidently, as noted in IUE AFL-CIO Pension Fund v. Locke Machine Co., Div. of U.S. Components Corp., 726 F. Supp. 561, 567 (D.N.J. 1989)

Only one circuit has suggested a corporate official may be personally liable for delinquent contributions without piercing the corporate veil. In Leddy v. Standard Drywall, Inc., 875 F.2d 383 (2d Cir. 1989), the Second Circuit held the president of the defendant corporation liable for delinquent contributions despite the finding of the lower court that there was insufficient evidence to pierce the corporate veil. Id. at 387. However, in Leddy, the president of the corporation had been indicted, along with other corporate officials, for defrauding the pension fund from contributions. Id. at 385.

The Scope Of The Exception – In my view, the success of such claims will typically require that the defendant be required to make the contributions, e.g., under the terms of a CBA plus a successful alter ego argument, and this in the context of fraudulent or deceptive conduct.  A personal guarantee of corporate obligations in the course of a workout might raise interesting possibilities beyond this context, but I am not aware of any cases on this point.